Whether it was Fed chair Jerome Powell’s October 3 comments that started the subsequent equities sell-off or not, it took less than two months for Powell to change his assessment of the US economy. In a speech yesterday at the Economic Club of New York, the Fed chair sounded upbeat on the economy while indicating that the Fed Funds Rate was probably just below the neutral rate.
The reaction was immediately up 0.9% in S&P 500 index futures with momentum extending after the cash market closed; S&P 500 Index futures were up 2% in yesterday’s session. In our Equity Update webinar on Tuesday
we did indeed argue that the Fed blinked and that rate hikes would likely end by Q1'19.
The economy is clearly late stage and several sectors are showing weakness, including housing. At this point it is probably more by the Fed to observe financial markets more than the economic data which by their very nature is lagging. If not, the Fed risks overshooting on rates.